INVESTMENT IN DEBT SECURITIES

AMORTIZED COST
Cathy Company acquired P 2,000,000 bonds on May 1, 2017 and its accountant correctly prepared
the following entry

Investment in Debt Securities at Amortized Cost 2,294,416

Cash 2,294,416

These bonds pay interest at a rate of 8% per annum every April 30 and will mature after 10 years.
Market rate of interest for the same bonds was 6%.

Based on the foregoing, determine the following:

1. Premium amortization for the year 2017.
a. P 63,553
b. P 42,369
c. P 22,335
d. P 14,890

2. The interest income to be presented in the 2019 Statement of Comprehensive Income.

a. P 135, 378
b. P 136,325
c. P 135,851
d. P 134,904

Jaily, Inc. purchased a bond investment in 2017 and was classified the same as investment at
amortized cost. Portion of the amortization table was presented below:

NOMINAL EFFECTIVE CARRYING

DATE AMORTIZZATION
INTEREST INTEREST VALUE
5/1/23 160,000 128,317 31,683 2,106,939
5/1/24 160,000 126,416 33,584 2,073,356
5/1/25 160,000 124,401 35,599 2,037,757
5/1/26 160,000 122,243 37,757 2,000,000

On November 30, 2025, Jaily sold the investments at 102 plus accrued interest.

3. Determine the gain or loss on sale of investment

a. P 24, 268, gain
b. P 24, 268, loss
c. P 12, 587, loss
d. P 12, 587, gain

On January 1, 2017, Chiara purchased debt securities which carry a 10% fixed interest for P 765,540
to be held as financial assets at amortized cost. The securities have face value of P 600,000, and
interests are receivable semi-annually every June 30 and December 31. The prevailing market
interest rate of debt securities of this type is 7%.

On October 31, 2018, Chiara sold 40% of the securities including any accrued interest for a gain of P
5,250.

Based on the foregoing, determine the following:

4. The carrying value of the bond investment on December 31, 2017.

a. P 762,334
b. P 759,016
c. P 600,000
d. P 771,840
 5. Total amount received by Chiara on the sale of 40% bond investment on October 31, 2018.
a. P 326,535
b. P 314,534
c. P 265,250
d. P 245,250

6. Interest income to be reported in the December 31, 2018 Statement of Comprehensive

Income.
a. P 60,000
b. P 56,000
c. P 49,485
d. P 53,011

7. Carrying value of the bond investment on December 31, 2018.

a. P 451,216
b. P 360,000
c. P 752,147
d. P 448,991

FAIR VALUE THROUGH PROFIT OR LOSS

Connie Company carried out the following transactions in bond investments held for trading during
the current year:

8/1 Purchased 5,000, P 1,000, 12% bonds of AAA Company at 104 plus accrued
interest. The bonds pay interest semi-annually on May 1 and November 1.

8/31 Purchased 2,000, P 1,000, 12% bonds of BBB Company at 98 plus accrued
interest. Semi-annual payments of interest are on June 30 and December 31.

12/1 Sold 2,000 of the AAA bonds at 102 plus accrued interest. Brokerage fee of P
160,000 was incurred.

12/31 AAA bonds were selling at 98. BBB bonds were selling at 99.

Determine the following:

8. Gain (loss) on sale of AAA bonds.
a. P 40,000 loss
b. P 40,000 gain
c. P 200,000 loss
d. P 200,000 gain

9. Total interest income for the year.

a. P 500,000
b. P 310,000
c. P 270,000
d. P 230,000

10. Unrealized gain (loss) to be reported in the profit or loss section of statement of
comprehensive income for the year.
a. P 160,000 UG
b. P 300,000 UG
c. P 160,000 UL
d. P 280,000 UL

For P 3,691,500, Cherry Company purchased a 5-year, 8% P 4,000,000 face value bonds of XYZ
Company on June 1, 2017. The bonds were purchased to yield 10% and pay interest every June 1 and
December 1.

The market value of the bonds on December 31, 2017, December 31, 2018 and December 31, 2019
were quoted at 97, 99, and 98, respectively.
If the investment in bonds were designated as Investment at fair value through profit or loss,
determine the following:

11. The 2017 interest income.

a. P 107,669
b. P 186,667
c. P 160,000
d. P 200,000

12. The unrealized gain to be reported in 2017 profit or loss section of the Statement of
comprehensive income.
a. P 188,500
b. P 120,000
c. P 110,745
d. P 73,830

13. The total amount to be reported in 2018 profit or loss section of the Statement of
comprehensive income
a. P 400,000
b. P 356,915
c. P 320,000
d. P 80,000

On December 1, 2017, Ronald Company purchased P 5,000,000, 15% face value bonds at 98. The
bonds mature on November 30, 2027 and pay interest semi-annually every May 31 and November
30. Transaction costs incurred in relation to acquisition is 3% of the bonds face value. Ronald
classified this investment as trading securities.

On November 30, 2020 after receiving the periodic interest, Ronald sold the investment at 101.

The bonds were quoted in the market at 98, 99 102, 100, and 97 on December 31, 2017, 2018, 2019,
2020, and 2021, respectively.

14. Determine the gain or loss on sale of the investments.

a. P 50,000, gain
b. P 50,000, loss
c. P 150,000, gain
d. P 150,000, loss

FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

On January 1, 2017, Alvin Corporation purchased 3 – year, 10%, 5,000 of P 1,000 face value bonds
for P 4,600,000. In relation to this acquisition, Alvin incurred P 160,000 broker’s commission. Alvin
intended to collect contractual cash flows and to sell the financial asset.

On June 30, 2019, Alvin sold the bonds at 110 plus interest.

Meanwhile, Alvin determined the following fair values at each year-end:

December 31, 2017 102
December 31, 2018 105
December 31, 2019 104

Using a 12% effective interest rate, determine the following:

15. Amount of unrealized gain to be reported as part as component of other comprehensive
income in the 2018 statement of comprehensive income
a. P 0
b. P 70,256
c. P 339,056
d. P 221,200
 16. Gain on sale of the bond on June 30, 2019.
a. P 250,000
b. P 544, 528
c. P 589,056
d. P 794, 528

On December 31, 2015, Alfred Company purchased 5 – year, P 500,000 face value bonds at a premium
of P 43,300, and classified the same as investment at fair value through other comprehensive income.
The bond indenture stated that Alfred will receive interest of P 35,000 annually.

In 2017, Alfred’s accountant recorded premium amortization of the bond in the amount of P 8,227.
On December 31, 2018, Alfred sold 60% of the bonds for P 300,450.

Following are the fair values of the bonds at each year-end:

DATE FAIR VALUE

12/31/16 P 535,500
12/31/17 P 537,500
12/31/18 P 500,750
12/31/19 P 210,060
12/31/20 P 250,130

Determine the following:

17. Carrying the value of the bond on December 31,2017.

a. P 535,465
b. P 527,238
c. P 537,500
d. P 518,600

18. Amount of unrealized gain or loss to be presented in the December 31, 2017 statement of
comprehensive income.
a. P 5,000 UG
b. P 5,000 UL
c. P 13,227 UG
d. P 13,227 UL

19. Interest income in 2018.

a. P 26,773
b. P 26.362
c. P 35,000
d. P 0

20. Gain or loss on sale

a. P 27,500 gain
b. P 27,500 loss
c. P 10,710 loss
d. P 10,710 gain
ANSWER KEY:
1. D
2. A
3. A
4. B
5. B
6. C
7. A
8. C
9. B
10. C
11. B
12. A
13. A
14. B
15. B
16. B
17. C
18. C
19. B
20. C